What to do with savings as interest rates fall

It's bad enough that people who were responsible about their finances and who did not get themselves into unrealistic debt are being hit by the downturn.

Those with savings though are being hit really hard by the fall in the interest rates being paid on savings by the banks and building societies.
A report in the Telgraph reveals that the Buidling societies have already cut the rates on their savings accounts by more than the Bank of England has over the past year.
The Bank of England is due to announce it's latest move on interest rates on Thursday and there is a lot of speculation that rates willl be cut further to 1.5%. Some have speculated that we couuld reach teh pioint that we would see negative rates on savings accounts. Thsi would mean that savings would earn no interest at all and that we would in fact pay the banks and building societies to hold our money. Although this seems unlikely it is not impossible.

For anyone who has savings and a mortgage at the moment the only sensible thing to do seems to be to use the savings to pay off some of the capital owed on the mortage.
When rates and prices start rising again as they surely will then this will help provide some insulation against the rises.

US Project Lifeline to support troubled Homeowners

Project Lifeline is a new plan in the US aimed at tackling housing market troubles caused by irresponsible sub-prime lending. The Bush Administration Project Life line plan aims to help homeowners facing foreclosures and the hope will be that it stems the tide of people defaulting on mortgages.

The plan, announced by the Treasury, and the Department of Housing and Urban Development is aimed at homoweners in default of payments for 90 days or more. Hoemowners in seriouus default who are at risk of foreclosure will have the process paused for 30 days. this period aims to allow borrowers to negotiate with their lenders possible more affordable payment terms. All stages of foreclosure would be suspended during this period.

Six major banks have so far announced their involvement in Project Life Line; The Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase & Co., Washington Mutual and Wells Fargo. Other lenders are being encouraged to participate.

With home prices falling people in trouble with their home borrowing face the prospect that selling will not solve their problems as they will owe more than the value of their homes. The crisis has reached the point where even people with normally good credit ratings have had problems with high mortageg payments.

As in the UK many people took out mortagages which had low interest/ initial payment arrangements in the early part of the mortage with the borrower moving to normal interest/payments at a later point. Borrowers who are moving of the low payments now face difficulties with repayments and find that selling s no longer an option.

The hope in the US will be that ths plan can stem the tide of falling house prices and mortgage defaults and foreclosures.

The housing market in the UK has similar issues with large numbers of eople who are due to move off fiox rate mortages having to face higher payments and sins of weakening in the housing market. In the UK less dramatic action has been taken, and been required, so far and it is unclear yet if the market will require such significant intervention.

UK Mortgage rates to 6% by December

Like most homeowners these days in the UK we have a fairly hefty mortgage. We have made some money on two previous house moves but this never seems to keep up with the rise in house prices - so we still find ourselves with a substantial mortgage. Now our finances are not as tight as some. There are people who are already spending a significant amount of their monthly income on financing their mortgage. we are not in that category because we remortgaged to a better deal when we moved. Nevertheless anything that pushes up our mortgage payments is not very welcome.

Well according to Mervyn king the Bank of England governor who was speaking to the Welsh CBI there is every reason to think that UK interest rates will rise to 6 per cent by the end of this year.

The bank kept rates on hold at 5.5 per cent last week. But Mervyn King has talked worrying inflationary pressures and he says these must be controlled.

He also gave a warning to those people who are on variable rate mortgages "Obvious though the point may seem, it is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels.”

It seems that he wants to see slower household and company spending and of course a rising interest rate would aim to achieve just that.

We are going to have another look at our mortgage and see if there might be any benefit for us in remortgaging at this point. I suspect that a lot of other people will be analysing their mortgage arrangements and thinking about whether there are any good re-mortgaging deals available.